Deadlock in Washington discussions on debt and spending jeopardises deal being reached before 1 January deadline
Fears that the US would fall over its looming fiscal cliff sent stock markets reeling and oil prices dropping on Friday as investors feared the political deadlock in Washington would drag down global growth.
With House members having left Washington on Thursday night for Christmas and Senate members scheduled to leave on Friday afternoon, the prospect of a deal before the 1 January deadline appeared bleak.
Republican House speaker John Boehner signalled he was not planning to quit after a Congressional debacle that left negotiations over debt and spending in complete chaos and the $600bn (£371bn) of new year tax rises and spending cuts more likely to kick in, potentially pushing the US back into recession.
Boehner summed up the mood in Washington. “How we get there? God only knows,” he said.
News of the breakdown triggered a sell off on US stock markets with the Dow Industrial Average falling more than 160 points before noon.
Jack Ablin, the chief investment officer at BMO Private Bank, said more sells-offs would come until a deal was done. “Every day that there isn’t an agreement will be a drag on the economy,” he said.
Oil prices dropped, with Brent crude falling more than $1 a barrel towards $109. But the dollar rallied, along with US government bonds, as investors shifted funds from risky assets into perceived safe havens. The FTSE 100 hit a low of 5894 points, but inched up to end the day down 0.3% at 5958 – still shy of the significant 6,000 mark.
Germany’s stock market was down 0.5% after consumer confidence dropped to its lowest level in more than a year.
The swift change in mood contrasted with earlier this week when president Barack Obama and Boehner had been closing in on a deal that would have raised taxes and cut spending. But the Democrats and Republicans now appear further away than they did a month ago after the stunning reversal in Congress on Thursday night.
Richard Griffiths, associate director of Berkeley Futures, said: “The market just stopped in its tracks after that unexpected announcement. Butit’s showing resilience. It’s not down by that much and people think it’s just a delay before they reach a deal in maybe three weeks’ time.”
Boehner’s credibility and authority as Speaker are on the line after he failed to push through a Republican bill aimed at offering a short-term fix. He had to withdraw it when confronted by a revolt by mainly Tea Party-backed Republican members of the Congress unwilling to countenance any tax rise.
Although he denied he was washing his hands of the whole issue on Friday and said he would continue talks, he effectively abandoned the process by saying it was up to the Senate and the White House rather than the House of Representatives to come up with a solution.
Sean West, policy analyst at political risk consultancy Eurasia Group, said the breakdown meant the US was “in a different world than it was earlier this week.”
Boehner faces an election for Speaker early in January when the new Congress convenes. Asked at the press conference if he was concerned about his job, he said: “No, I’m not. Listen, you’ve all heard me say this and I’ve told my colleagues the same thing, if you do the right things every day for the right reasons, the right things happen.”
What made the debate such a humiliation for Boehner was that it was a purely Republican one. The so-called Plan B bill would have limited tax rises in January just to those earning £1m or more a year. Democrats want the rises to kick in at $250,000 or even, as Obama proposed, $400,000.